IPOs Get Done But Many Miss Targets

Many public offerings are not hitting their price targets, but observers say that’s no cause for concern

By Ken Tarbous
April 30, 2010

Seven initial public offerings priced on April 21 — the most in a single trading session since November 2007 — but only three of the companies got the price they wanted.

As Wall Street underwriters see it, the inability to hit targets suggests that investors are challenging what is presented in deal prospectuses, particularly when it comes to valuing a young business.

"The first two months of the year were somewhat cautionary with price sensitivity from institutional investors," said Phil Drury, a managing director in equity capital markets and the head of Americas syndicate at Citigroup.

Specialists with Wall Street syndicate desks are not exactly worried about IPOs that are being completed below their target price range. For starters, getting any new company into the public markets is a big accomplishment after the new-issues drought of 2008 and 2009.

Nevertheless, only about half the deals that have come to market this year — 34 in all — have priced within or above their target range. Market participants say the companies that have gone public include small-cap businesses that are involved in life sciences or technology and need the money from an IPO to fund their cash-hungry businesses.

Dealmakers expect larger businesses from a wider range of industries to go public in the third and fourth quarters, and that may improve investor appetite and ensure that businesses sell their stock at or above their targets.

"The remainder of 2010 will be strong for IPOs, both because buyers seem to be interested in solid offerings, as well as the fact that the IPO backlog has more mature companies than usual," said Peter Falvey, co-head of technology investment banking at Morgan Keegan. "Without a decent IPO market, companies have tended to stay private longer and therefore are now more mature and arguably better positioned to execute higher-quality IPOs."

The three April 21 issues that hit their price targets were the software company SPS Commerce, the biotech company Codexis and the software maker DynaVox.

SPS had expected to sell 3.3 million shares for $11 to $13 each. It sold 4.1 million shares at $12 each, raising $49.2 million. Codexis, whose target range was $13 to $15 a share, sold 6 million shares (as it had expected) at $13 each. Its IPO raised $78 million.

DynaVox, whose target range was $15 to $17 a share, sold 9.4 million shares at $15 each. The offering raised $140.6 million.

The other four IPOs that day did not fare as well.

THL Credit, an investment firm taken public by Thomas H. Lee Partners, had planned to sell 13.7 million shares at $15 each. Instead, it sold 15.3 million shares at $13 each and raised only $199 million. Alimera Sciences, a biotech firm, priced 6.5 million shares (or 500,000 more than it had planned to sell) at $11, well below its target range of $15 to $17. The IPO brought in $71.5 million.

Global Geophysics, a gas and oil services company, expected to sell 11.5 million shares for $15 to $17 each. It sold 7.5 million at $12, raising $90 million. Mitel Networks, a communications company, expected to sell 12.1 million shares with a price range of $18 to $20. It sold only 10.5 million at $15 each, raising $147 million.

"It's definitely deal specific," Drury said. "Overall we think appetite is strong. Investors are working through their valuations on a name-by-name basis."

Bankers said people should not make much about the fact that seven deals came to market on a single day; most bankers chalked it up to coincidence. Typically, underwriters like to sell new issues on a Tuesday or Wednesday, because they like to interact with investors a day before the actual pricing. Also, deals set to set to price on a Thursday could hit snags that force them to wait until the following week, bankers said.

As of April 27, 34 IPO issues have made it to market in the U.S. this year, generating proceeds of $4.7 billion, versus 52 first-time equity issues that raised $16.7 billion in all of last year, according to Thomson Reuters. In 2008, 31 IPOs raised $26.7 billion.

Syndicate pros say it may be too early to proclaim a turnaround for the IPO market, even if broader equity indexes like the Dow Jones industrial average, the Standard & Poor's 500 and the Russell Small Cap have bounced back.

"It is difficult to know how long the IPO market will stay open. The IPO window tends to become more open or closed based on the overall health of the equity markets," said Falvey.

Nevertheless, the seven issues in a single day last week clearly raises hopes on Wall Street and in boardrooms that the IPO market has reopened, providing an important source of liquidity for venture capital firms and private-equity sponsors.

"We're operating in an environment currently where valuations have recovered and institutional investors are seeking returns through new issues," said Drury. "That's a meaningful turnaround from where we were 12 months ago."

Symetra Financial Corp., a Bellevue, Wash., financial services company took in $364.8 million in proceeds in its IPO, which was the largest so far this year as of April 27. Primerica, a financial services company spun off by Citigroup, had the second-largest, raising $320.4 million, followed by Generac Holdings, a Wisconsin generator company backed by private equity, with $243.8 million.

San Diego REIT Excel Trust brought in $210 million of proceeds in the largest issue to price last week.

Bankers say the traditional IPOs in the range of $500 million to $1 billion could make a return; many large offerings are expected to come from private-equity sponsors seeking to sell off companies in their portfolios. Large deals may benefit from the return of institutional investors like pension funds and endowments.

"The class of IPOs currently in registration, along with the recent acceleration of filings, provides a better look into the health of the market in the latter part of the summer and the rest of the year," said Brad Miller, global co-head of equity syndicate at Deutsche Bank. "The dialogue around some of the larger deals, such as the sponsor-related IPOs that may come in the third quarter and beyond, will be the real bellwether with respect to the depth of investor appetite and how well these deals are received and trade in the aftermarket."

This year, IPO registrations have jumped. At the end of first quarter, 80 companies had registrations on file with the Securities and Exchange Commission, according to Ernst & Young. They are seeking $11.4 billion, but 26 companies planned to raise $100 million or less.

A quarter earlier, 54 registrations were on file, with companies seeking $10.3 billion. On March 31 of last year, there were 44 registrations on file for $11.7 billion.

"In the tech sector, we're seeing many in the venture capital community and at various corporates now looking to access the capital markets," said Pete Chapman, co-head of Americas equity capital markets at Bank of America Merrill Lynch. "Generally speaking, the market has been extremely receptive to tech offerings given the propensity of strong visible cash flows, low leverage and solid growth."

Post-CIT Edgeview Takes Shape

New owners hope that being out from under a struggling parent will help the boutique attract both employees and customers

By Ken Tarbous
April 23, 2010

Just weeks after four bankers purchased their firm from CIT Group, dealmakers at Edgeview Partners say their independence will help them focus more closely on advising clients and they'll be adding staff.

The atmosphere in Edgeview's Charlotte offices has changed since the "reacquisition," said Bill Morrissett, a co-founder of the middle-market firm and one of its new owners. "A real sense of passion, a sense of mission" that filled the offices in the pre-CIT days has returned.

Morrissett said that Edgeview's professional staff totals in the mid-20s and should reach 30 by yearend as his firm brings on analysts fresh out of college and associates out of business school. As the M&A market strengthens and the firm grows, senior hires will be made, he said.

(In 2007, the firm had between 45 and 50 bankers; the credit crisis forced it to cut staff, and some professionals left on their own.)

Since the reacquisition was announced April 5, Edgeview has received five invitations to compete for business. That may suggest the market views the boutique differently now that it is independent.

Within a year after purchasing Edgeview in July 2007, CIT was swamped by the credit crisis. Last year, the specialty lender landed in bankruptcy court — producing the largest prepackaged court workout in U.S. corporate history.

Bringing Edgeview under the CIT umbrella was the brainchild of Jeffrey Peek, then the lender's chief executive. Initially, the synergies were evident; Edgeview would put together deals, and CIT would help finance them. That got tougher when CIT's own balance sheet deteriorated.

"It became extraordinarily problematic for us to try to conduct our business with clients with that [CIT's credit problems] as the backdrop," said Morrissett, who reacquired Edgeview along with David Patterson, another co-founder; Ted Garner, who joined Edgeview as a partner in 2002; and John Tye, who joined in 2003. (The price was not made public.)

CIT has emerged from bankruptcy, and former Merrill Lynch CEO John Thain now runs it. Even before the bankruptcy process was started in November 2009, Edgeview wanted to spring itself from the lending company.

"We simply felt that we needed to separate ourselves from CIT, not because of any broad generalities surrounding CIT, but very specifically because of the issues CIT itself was facing and how that was impacting and was likely to continue to impact our business," Morrissett, who had left Edgeview last fall, said in a telephone interview with IDD this week.

Edgeview's bankers built relationships with individual bankers at CIT, especially the leverage finance professionals, he said, and he believes the individuals will likely work with one another again on future transactions.

The boutique has ambitious plans for the future, but they are tempered by a cautious view of the state of the marketplace, given the M&A activity levels of the past several years. In 2006, the value of U.S. deals with enterprise value of $300 million or less totaled $153 billion, according to Thomson Reuters. The value of such activity fell 2.6% in 2007, to $149 billion. It fell another 20.8% in 2008, to $118 billion, and 41.5% last year, to $69 billion.

A large percentage of Edgeview assignments involve advising firms that are up for sale. It is targeting aerospace and defense, building products, business services and energy services companies. Its bankers also advise firms in areas such as applied technology and transportation and logistics.

Edgeview has no immediate plans to grow beyond its Charlotte office, but Morrissett leaves open the possibility of other locations eventually.

The boutique traces its roots back to Bowles Hollowell Connor, where the partners worked in the 1990s on a broad range of "generalist" mergers and acquisitions. First Union purchased Bowles Hollowell in 1998, and Edgeview was founded three years later.

Raynard Benvenuti, managing director at Greenbriar Equity Group, said Morrissett's return is a good sign for the firm. "As long as Bill Morrissett and the people I know are there, I would depend upon that team, and I have confidence in them." In 2006, Benvenuti was the CEO of Stellex Aerostructures, then a Carlyle Group company, when Edgeview advised Carlyle on Stellex's sale to GKN PLC.

Edgeview also earned praise from private-equity professionals for its ability to get high valuations for companies it is selling. In some cases, firms purchasing companies advised by Edgeview brought it on as an adviser for subsequent deals.

"They have always done such a good job selling companies. They got such good values that we always had a hard time buying something from them. It's easier to engage them to sell things for you than to buy from them," said Sam Shimer, a partner at JHW Greentree Capital, which hired Edgeview to advise on the sale of its portfolio company Jan-Pro Holdings to a group led by Webster Capital.

Shimer and other market participants said the association with CIT was immaterial for Edgeview clients, since CIT's ability to finance deals wasn't that much of a concern for the boutique's sell-side clients.

"CIT never got involved in financing any of the transactions that Edgeview was involved with for us," said Shimer. "So there was no benefit of that relationship. There was nothing incremental to us from CIT."

Edgeview had its most successful year in 2006, when it closed nearly 25 transactions with $2.5 billion of aggregate enterprise value. According to former employees, morale inside the boutique began to sink within six months after CIT purchased the business. When credit conditions worsened and CIT's financial health became more precarious, some would-be clients were wary of engaging Edgeview for advisory work, the former employees said, because they worried that problems at CIT could scotch potential deals.

"Frankly, given some of CIT's economic travails in the last year, that may have made me hesitant to use them," said one market participant who has engaged Edgeview for advisory work in the past and asked not to be named. "You're not going to want to kick off a sale process — it's a six- to 12-month process, soup to nuts — you have a hard time going with a group that might be part of a parent that's economically unstable."

A Decade Later, Chicago Corp. Reopens

Investment Dealers' Digest

Executives at the new Chicago Corp. see a sweet spot in the M&A advisory market: middle-market firms in the Midwest

By Ken Tarbous
April 16, 2010

Investment bankers have brought Chicago Corp. back to life in response to forecasts that the Midwest in general, and the Windy City in particular, will be a good source of deals involving middle-market companies.

The original Chicago Corp., which took Waste Management public, was co-founded in 1965 by Bob Podesta, who left four years later to become assistant secretary of the Commerce Department in the Nixon administration.

Now the new version’s employees, including veterans of the old Chicago Corp., plan to build a full-service investment bank with research, sales and trading to serve institutional investors. They say they can establish a foothold in the market for advising companies worth $100 million or less, because dealmakers at many large firms do not focus on middle-market businesses. They are using their Chicago address as a selling point for clients in the Midwest.

It operated for just over three decades and underwrote municipal bonds, corporate bonds and initial public offerings until ABN Amro bought it in 1997. The Dutch banking giant moved the firm to New York soon afterward. A year after the purchase, ABN Amro abandoned the Chicago Corp. name. The new version was started in February.

Last year dealmakers completed 260 mergers and acquisitions worth $56.5 billion involving middle-market companies in the United States.

“What … was really going to be an important need that had to be filled was providing the kind of advice that those companies are entitled to that they can’t get simply because of their size,” said Fred Floberg, a managing director and co-founder of the new Chicago Corp.

Brent Gledhill, global head of corporate finance at William Blair & Co., advises on the sales and purchases of middle-market and large-cap companies. “On the M&A front, the sub-$50 million deal value world is probably underbanked as a sector,” he said. “There is a very under served niche of smaller companies that exist across the U.S., not just the Midwest, that will support the new firms and small boutiques.”

The market that has caught the attention of Chicago Corp., William Blair, Robert W. Baird & Co., Brown Gibbons Lang, Houlihan Lokey and Greenhill & Co. and other firms is known as the Big Ten — a reference to the athletic conference based there — includes Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio, Pennsylvania and Wisconsin. Dealmakers say these states are rich with small-cap companies, many family-owned, in a broad range of industries such manufacturing, health care, business services, financial services, transportation and warehousing.

“What marks this economy is its diversity. There are great universities that feed in entrepreneurial ideas: University of Chicago, Northwestern-Kellogg and DePaul and IIT [the Illinois Institute of Technology], which is strong in terms of business incubation,” said John Challenger, chief executive of Chicago placement consulting firm Challenger, Gray & Christmas Inc.

The new Chicago Corp. has 12 senior advisers and nine managing directors, including Phil Clarke III, the son of one of the original firm’s founders. It said it plans more hiring; last month it landed its first sell-side assignment and brought on its first financial consulting client. (The firm would not identify either client.)

Chicago Corp. will also offer M&A and restructuring advice. It will focus on public and private companies in industries like distribution and manufacturing, health care, technology, energy, environmental science and financial services.

Before resuscitating Chicago Corp., Clarke, Floberg, Stanley Cutter, Robert Gold, Rick Heyke, Bill Lear and Mike Zook were managing directors at Focus LLC, a Chicago firm specializing in financial consulting and M&A advisory services for middle-market companies. The executives said they got the idea of reviving Chicago Corp. while they were at Focus.

Clarke said the idea of bringing back Chicago Corp. produced a wave of nostalgia; dealmakers from the first version had stayed in touch after ABN Amro shuttered it, and they had at least one reunion.

Chicago Corp. is also drawing executives from elsewhere, including Thomas Denison, the founder and president of Denison Partners LLC, a provider of corporate finance advice to middle-market businesses, and Keith Walz, who was previously managing partner of Kinsale Capital Partners, a private-equity firm focused on middle-market companies.

In its original form, The Chicago Corp. raised money through sales of debt and equity for public and private companies and municipal governments.

The bank completed the sale of $10 million of subordinated debt for Sun Electric Corp. and placed 100,000 shares of common stock at $48.75 for multi-industry manufacturer Textron Corp., among its assignments in the 1960s.

John Guequierre, CEO of the modular home manufacturer Pleasant Street Homes LLC, remembers the original Chicago Corp. well and says the latest version will be well received. In the 1990s, when he was the president of another modular home company, Schult Homes Corp., Guequierre hired Chicago Corp. to help him raise money through a secondary offering. That was the first of several assignments he gave Chicago Corp.

“We were not a large company and would have been a mismatch for one of the large investment banking houses,” Guequierre said. “They have an expertise in a whole range of mid-market transactions, and they’ve got a really good understanding of the kind of business environment that those of us in midsize businesses have. There is an important market for that kind of service.”

IDD's 2010 "40 Under 40" - Scott Warrender

By Ken Tarbous
March 19, 2010

The lessons Scott Warrender has learned in the boxing ring have served him well in his career.

The managing director and sector head for oilfield services and downstream refining and marketing at Bank of America Merrill Lynch posted a winning record as an amateur boxer.

He once trained at the famed Gleason’s Gym in Brooklyn, and he fought in the prestigious Golden Gloves tournament.

“Investment banking, from my perspective, is very much a marathon and not a sprint,” Warrender said. “It takes significant effort over an extended

period of time, both during early career development and in building client

elationships at a senior level. That is why I think many people decide not to stick it through to the endgame.

“I think boxing was very much the same way. I saw a lot of folks who got into it, and before they possessed the requisite skills, they wanted to get into the ring to see what they could do. When the end result was inevitably bad, they quickly moved on to other pursuits.”

In late 2002, he answered the call to help B of A establish an oilfield services and refining and marketing franchise in Houston. He called on employees and resources from elsewhere in the Charlotte company to help in this effort, and he hired professionals from outside the company.

In the years it took to build the Houston operation, B of A was an unknown entity in that industry, and he and his team had to fight the notion that his company was nothing more than a lender.

In addition to the usual start-up and buildout concerns, Warrender had to form and nourish relationships in Houston’s well-established and tight-knit energy community.

When he took over the coverage of the oilfield services and refining and marketing sectors, B of A had never been the book runner for a single capital markets transaction or provided

advisory services within either sector.

Warrender and his team established a foothold in markets such as investment grade, high-yield and convertible debt, equities and IPOs. Also, the group provides M&A advice for buyers and sellers.

He gives credit to his colleagues and supervisors and says they had the patience to stand and fight to win the mandates that have helped the franchise grow.



Title: managing director, sector head for oil field services and refining and marketing
Company: Bank of America Merrill Lynch
Age: 36
Time with Company: 8 years

IDD's 2010 "40 Under 40" - Gopal Garuda

By Ken Tarbous
March 19, 2010

Gopal Garuda isn't the type of person who waits for things to happen.

In his first two months at Citadel Securities, he completed Advanced Micro Devices' $500 million high-yield bond offering and $1 billion tender offer for outstanding 5.75% convertible notes. The offerings were part of Citadel's first underwriting transaction as an investment bank.

During his studies at Harvard University, Garuda heard about the legend of Ken Griffin, the founder of Citadel Investment Group, who traded convertibles out of his dorm room during his freshman year at the school.

Garuda, 33, has known many successes as well. At Harvard, he earned two degrees — a bachelor's in economics and a master's in statistics — and wrote a widely cited Harvard International Review article on the International Monetary Fund.

He grew up in the affluent Cleveland suburbs where he watched his father run an independent financial planning practice advising high-net-worth individuals. Garuda started his Wall Street career in 1998 as an equity derivatives trader at Merrill Lynch, but in 2000 he decided to go to Silicon Valley to become a technology banker.

He quickly acclimated to the change in lifestyle and temperature (not to mention the more laid-back atmosphere) in California, where he has taken up long-distance running.

He spent 10 years at Merrill and B of A Merrill, but it didn't take any arm-twisting to get Garuda to join Citadel in September. "It was an easy decision to join Citadel Securities. I have tremendous respect and admiration for the organization. It attracts people who are smart and innovative and who know how to find opportunity in a dislocated market. We have assembled a great team from many of the most respected investment banks on Wall Street."

Title: managing director and co-head of technology investment banking
Company: Citadel Securities
Age: 33
Time with Company: 7 months

IDD's 2010 "40 Under 40" - Noah Bulkin

By Ken Tarbous
March 19, 2010


Noah Bulkin considered taking up law and went as far as interning at Linklaters' Brussels office before enrolling at Oxford University.

But all it took was one visit to Merrill Lynch's London office to get him hooked on investment banking. The 33-year-old Bulkin continues to make deals as head of mergers and acquisitions for EMEA real estate, gaming and leisure at Bank of America Merrill Lynch.

He was appointed to that post last year, and over the past 18 months he has been assuming more responsibility for the firm's U.K. M&A operations across all sectors, a job that has made use of his broad skill set.

Bulkin, who spent the first 11 years of his life in New York, thrives on competition and loves making deals — the more challenging and complex, the better.

He counts himself among the professionals who have made lifestyle sacrifices for his work. Bulkin spent more than a year helping Electricite de France (EDF) with its pursuit and eventual $23.2 billion acquisition of nuclear power giant British Energy and then arranged a deal to sell a minority stake in the company to Centrica plc for $3.5 billion.

The purchase of British Energy involved the U.K. government as both a shareholder and an energy policymaker. Bulkin says the cross-border transaction and its complex structure changed the way energy deals are made in Europe.

"For me, the thrill of a contested M&A situation and the ability to participate in really transforming a business ... are really the things I probably get the biggest buzz from," Bulkin said.

Title: head of real estate, gaming & lodging M&A for EMEA
Company: Bank of America Merrill Lynch
Age: 33
Time with Company: 11 years

Health Care Deal of the Year: Pfizer Buys Wyeth

Pfizer and Wyeth overcame more than their fair share of challenges to bring a groundbreaking deal to fruition.

By Ken Tarbous
January 29, 2010

As it turns out, Pfizer’s $68 billion acquisition of Wyeth is the deal that almost wasn’t.

Wyeth was shy during the courtship. There was debate about the price of this mammoth transaction, and — most importantly — credit markets were chaotic when dealmakers were crafting the terms.

But when the hefty deal was unveiled in January of last year, it showed the world that Wall Street was still open for business. That earns the purchase the title of Health Care Deal of the Year.

Long before Jeffrey Kindler, the chief executive of Pfizer, met in June 2008 with his Wyeth counterpart, Bernard Poussot, each of the pharmaceutical giants had been looking at new strategies for achieving their goals.

“Pfizer went through a very thoughtful process to understand their strategic options. There was a very thoughtful front-end period, from which this transaction ultimately evolved,” says Ken Hitchner, global co-head of health care investment banking at Goldman Sachs.

Pfizer paid 66% of the price in cash and 34% in stock. Bankers say Wyeth’s top managers saw that the target’s various businesses would dovetail nicely with its own.

“Management’s bold vision not only redefined Pfizer from an operational standpoint by diversifying their presence in vaccines, biologicals, consumer health and nutrition, but also financially — from a tax standpoint, a dividend standpoint and with their shareholder base,” says Drew Burch, head of health care mergers and acquisitions at Barclays Capital.

With Goldman Sachs, Barclays, Bank of America Merrill Lynch, Citigroup and JPMorgan Chase as advisers, Pfizer diligently pursued Wyeth. However, the severe market dislocation and the Lehman Brothers bankruptcy roiled the credit markets, complicating efforts to complete the transaction.

“The thing that differentiates it is that this deal was negotiated while the financial world was falling apart,” says Paul J. Taubman, co-head of institutional securities at Morgan Stanley. “There were no clear metrics to use, since the world was changing so fast. To be able to achieve a full valuation and deal certainty and have the economics hold up so well a year after it was agreed, that’s what is so differentiating.”

Wyeth, with Morgan Stanley and Evercore Partners as advisers, was steadfast in its view that a deal would need to produce long-term value for its own shareholders.

“One of the central questions was how Pfizer would finance the purchase price. Even in good markets, a deal this size can be difficult to finance,” said Clinton Gartin, head of the health care banking at Morgan Stanley.

The behemoth deal required a $22.5 billion bridge loan and included a $4.5 billion reverse termination fee tied to Pfizer’s credit ratings. Both were salient points of the deal.

“The transaction was groundbreaking at almost every level. It was a critical strategic initiative and an important opportunity for Pfizer from an M&A and a strategic perspective. It was complex and had tremendous scale, and the financing was, in its own right, transformational by virtue of its size in the context of unprecedented market turmoil,” says Wylie Collins, a managing director in debt capital markets at Bank of America Merrill Lynch. “On all deals as complex and large as this, the M&A and financing are inextricably linked, so it is very important for all components of a transaction to work. This was even more important given the historic market environment under which the deal was consummated.”

Media Deal of the Year: Disney Buys Marvel

A marriage between the entertainment titans Disney and Marvel has proved a smash hit with the investment community.

The bankers involved in Walt Disney & Co.'s acquisition of Marvel Entertainment, the publisher of comic books featuring superheroes like Spider-Man and Iron Man, had deal books and fairness opinions with titles like "How Mickey and Spidey Got Hitched." The parties in the transaction were given character names — Disney was referred to as "Daredevil," while Marvel was called "Maverick" — and many of the young associates on the deal will probably remember this (in the words of one banker involved) as their "coolest" assignment.

But this deal was about more than the coolness factor. Disney got 5,000 or so Marvel characters, who can be brought to life on film and in theme parks. The thousands of characters involved in this purchase, including the ones in the boardroom, make this IDD's Media Deal of the Year.

Disney had had its eye on Marvel for a while, but it came as a surprise to Isaac Perlmutter, Marvel's chief executive, when Robert Iger, Disney's president and CEO (who was behind the entertainment giant's $6.3 billion purchase of Pixar in 2006), called in June to discuss a possible deal.

"Disney is a content company, a creative company — probably the best in the world — and has a strong understanding of intellectual property. Marvel also has a deep culture with a sensitivity to Hollywood interpretations, and the company's convictions about its characters and storylines are almost religion," says Jeff Kaplan, global head of M&A at Bank of America Merrill Lynch, which acted as the sole adviser to Marvel and has a longstanding relationship with its senior management.

Both Perlmutter and Marvel's board believed in the long-term value of the sale, and they wanted to retain an interest in the company and maintain some creative control over the content, so the transaction, worth $4.3 billion, was structured as a combination of stock (40%) and cash (60%). Perlmutter will oversee Marvel operations within the Disney kingdom.

"Marvel had presence in the boys space, but what it lacked was a big consumer presence," says Andy Gordon, head of global media investment banking at Goldman Sachs, which served as financial adviser to Disney. "As Marvel is at its core a content company, the deal is consistent as part of Disney's strategy to provide high-quality content. Most people felt this was a perfect combination."

Investors certainly saw the possibilities in a Marvel-Disney marriage. Disney shares closed at $26.84 on the last day of trading before the deal was announced, but at midday yesterday they were changing hands at $28.77.

Primary Dealership Just One Step for MF Global

MF Global, spun off from a hedge fund manager, has growth plans that include leveraging its status as a Treasury securities dealer.

By Ken Tarbous
January 15, 2010

MF Global aspires to be more than just a broker-dealer and clearing house. Spun off in an IPO three years ago by hedge fund manager Man Financial, the futures and options brokerage has plans to compete with Wall Street banks.

Well along in the application process to become a U.S. primary dealer, MF Global this month completed the relocation of its corporate domicile from Bermuda — a locale fraught with negative associations for many in the financial world — to Delaware. It's a move the company acknowledges was, in part, "reputational," but some market participants see an attempt to placate the Federal Reserve.

"We believe this move to Delaware will help MF in the process to become a primary dealer," Roger Freeman, an analyst at Barclays Capital, said in a report.

While foreign entities are allowed into the elite club of primary dealers that deal directly with the Fed trading in Treasury securities, Bermuda is seen as a domicile with light corporate governance and the Fed must consider its public image when it approves new primary dealers.

"The Fed is cognizant of their own reputational risk. If they allow a dealer who shouldn't become a dealer, that might have an impact on their own reputation," says a market participant involved in his bank's primary dealer operations who did not want to be named.

MF Global's quest to become a primary dealer is not a done deal, and the company declined to discuss its application.

Motivation for becoming a primary dealer goes beyond making money on Treasury transactions.

Prestige and the attendant growth in client and counterparty bases play a large role in deciding to push to become a primary dealer, and that likely has been a factor in MF Global's thinking, market participants say.

"Some institutions will only deal with primary dealers. If nothing else, they feel like the primary dealers are more scrutinized by the Fed. Whether or not that's true, it's the perception," says one market participant who declined to be named.

The New York Fed, for its part, reiterated this week that the primary-dealer designation is not an endorsement. Indeed, Lehman Brothers and Bear Stearns were primary dealers.

Meanwhile, the road to becoming a primary dealer may have gotten tougher in recent days.

The New York Fed announced this week a "more formal" set of rules and requirements for primary dealers. With these new rules primary dealer firms have to hold at least $150 million in net capital, up from $50 million.

Treasury volume is expected to be up next year as the U.S. government finances a record deficit, making the role of primary dealers all the more lucrative in that the business area can draw in new clients and help leverage relationships with existing clients, particularly in fixed income.

"When you are a primary dealer, you see some flows you wouldn't otherwise see, particularly in repos. There are certain advantages in becoming a primary dealer. That's where the moneymaking opportunity is. You can see who is buying. The flow, that's where you can take advantage of market," says a market participant who was involved in his bank's primary dealer operations and did not want to be named.

MF Global has not stood by and waited for that primary-dealer status to build up its presence in fixed income.

Since last year MF has been building its high-grade corporate and high-yield business areas as part of its expansion in the fixed income, Niamh Alexander, equity analyst Keefe, Bruyette & Woods who tracks MF Global.

Geographically, Asia remains a growth area where the brokerage has added sales and trading professionals, Alexander says. But there have been notable changes within the ranks of management and high-profile roles.

In October 2008, former Chicago Board of Trade chief executive officer Bernard Dan, who joined MF Global in June 2008 as president and North America chief operating officer, was named CEO. In April 2008, Randy MacDonald, who filled several roles at TD Ameritrade Holding from 2000-2007, joined as chief financial officer.

Robert Lyons joined in September as COO for North America after spending more than 20 years at Bear Stearns, serving as COO in the global equities division, among other roles. And in October, James O'Sullivan was hired as MF Global's chief economist, coming from a similar role at UBS.

Aside from Treasuries and corporate debt, MF Global has also stepped up its presence in the important government agency debt business.

Late last year, MF Global received accreditation as a Federal Home Loan Bank underwriter and reallowance dealer.

FHLB discount note issuance totaled nearly $1.5 trillion in 2009 and overnight issuance averaged about $23 billion per day.

Those new business relationships could be leveraged in other business areas, including what one analyst who declined to be named named says may be an expansion into investment banking at a time when the number of major Wall Street firms has been whittled down by the credit crisis.

With all the plans to grow beyond its roots, MF Global has encountered some difficulties with regulators in recent years. In December, for example, Commodity Futures Trading Commission regulators fined MF Global $10 million for risk-management practices related to a rogue futures trader's actions in 2008.

And, as is the case with any buildout on Wall Street, firms with ambitions need to spend money to attract talent. MF Global has spent more on compensation and expenses, while taking in lower revenue because of declines in futures trading volume across the industry, something that has caught the attention of rating agencies.

In November, Moody's Investor Service downgraded MF Global's outlook from stable to negative, maintaining its issuer rating at Baa2, still an investment-grade rating, according to Alexander Yavosky, vice president and senior financial institutions group analyst at Moody's.

A number of issues factor into rating agency analysts' thinking and one of them was the issue of compensation and expenses.

In addition, MF Global has a highly levered balance sheet, a way of maintaining revenue in a low interest rate environment that increases risk for creditors, Yavosky says.

MF Global is not alone in its efforts to become a primary dealer. Other firms vying for the role include Scotia Capital, Societe Generale, and TD Securities, according to market sources.

Like MF Global, these companies may be looking to use the primary dealer status as a stepping stone to becoming a full service bulge-bracket firm like Bank of America Merrill Lynch or JPMorgan Chase.

New Dot-Com Party Not Strictly Social

Deal makers see traditional and clean-tech firms leading the next wave, and social media offerings may be part of the mix.

By Ken Tarbous
January 22, 2010

For a while now, Wall Street has been buzzing about the possibility of a sequel to the dot-com IPO boom of a decade ago. The question is — if it does materialize — what will it look like?

Names like Facebook, Twitter, and LinkedIn have been suggested as candidates for an initial public offering, but this new generation likely won't be relegated solely to social media startups.

Deal makers say possible candidates include semiconductor makers and information technology firms that will be touted for their traditional business models and valuation methodologies.

Any notable uptick in IPOs likely will be welcome at Wall Street investment banks, where new-issue activity has dramatically dropped off amid the credit crisis and other sources of fee income like securitization have fallen as well.

"The companies ... are going to be cash-flow generators ... that are profitable, companies with real products, from communications to internal resources making systems work better, not just dot-coms with sites trying to generate advertising revenues," says Lee Graul, partner at the BDO Capital Markets.

A recent survey of investment banks conducted by BDO Capital Markets found that market participants overwhelmingly expect the technology sector to dominate IPO issuance this year.

"Clearly, the interest in and the supply of technology IPOs is high and getting higher. We've had two years of a dry spell," says Cully Davis, head of technology equity capital markets at Credit Suisse.

As Davis sees it, "A lot of companies are still out there innovating and they need capital to grow. On the buy side, especially technology investors who manage growth funds, we see investors who are starved for significant growth opportunities."

Surpassing last year's total of tech-related IPOs doesn't appear to be too difficult a feat considering there were nine U.S. tech IPOs in 2009, with proceeds of $3.464 billion.

In 2008 the drought was more extreme: there were a mere three tech IPOs with a value of $749.2 million, according to data from Thomson Reuters.

Deal makers have to go back three years to 2007, the last robust tech IPO season. In 2007, 43 U.S. tech IPOs valued at $7.651 billion were completed, according to Thomson Reuters.

The drop in IPO volume has had an impact on investment bank earnings in recent years.

The overall disclosed IPO fees for Goldman Sachs dropped from $395.7 million in 2006 to $171.7 million in 2009, according to Thomson Reuters.

Bank of America Merrill Lynch, which topped the 2007 league tables for overall disclosed IPO fees with $346.4 million, saw its fees drop to $140.1 million in 2009.

"There's been stiff competition for assignments, so fees have gone down but those fees will come back up again. The issuers have been in control but by the end of 2010 the banks will be in control again, and fees will reflect that," says Hugh Johnson, chairman and chief investment officer at Johnson Illington Advisors, a money management and advisory firm based in Albany, N.Y.

The competing investment banks have broken into two groups, the larger companies with commercial banking arms, and a second level of boutique banks that are extremely performance-oriented and populated with bankers who have migrated to boutiques because of questions and concerns over compensation, Johnson says.

Over the past several years banks have profited from the interest rate environment. But as rates start to climb, banks are forced back to the basics of traditional investment banking.

"That side of the ledger is attempting to do a number of things aggressively, using their capital to make money trading stocks, bonds, commodities, you name it," Johnson says. "They're also doing more of the traditional roles of investment banking. It's clear that they're really focused on the investment banking side. The commercial banking business stinks. The investment banking business is starting to come back to life."

Any dramatic — and regular — return of IPO issuance would likely be most welcome among venture capital firms that need to recoup their investments in startups.

In recent years, many venture capitalists have had to resort to mergers and acquisitions as a way to cash out of their investments because they could not rely on bringing their companies to the public markets.

"There's been a lot of hype on this, the sudden opening of the IPO market," says Mark Heesen, president of the National Venture Capital Association. "Unfortunately, you have to look at the numbers. Was there an increase in registration in December? Yes. Is that a good sign? Yes. Is this a new era in IPOs? I'm not ready to go that far yet. I have been hearing this for six months now that [banks are] pushing work away."

BDO Capital Markets' Graul adds that "a lot of technology companies ... have been prepared to go to market by venture capital firms and private-equity firms who haven't been able to exit because of the market."

In what may be a recognition of larger changes in the broader economy, deal makers say the next wave of tech companies likely will include clean-tech businesses.

Codexis, a maker of enzymes used in biofuels and based in California, and China-based Jinko Solar Holding, a solar cell manufacturer, are among the clean tech companies that have registered in the past month for IPOs.

Many of these companies have benefitted from the tremendous amount of money coming from government initiatives, according to Credit Suisse's Davis.

Nearly two dozen well-positioned firms, fitting into a wide definition for tech companies and held by financial sponsors or venture capital groups, are waiting for equity markets to strengthen further as they prepare to go public, market participants say.

Still, some bankers contend the market will be excited to see IPOs from the broader digital media group, which would have an appeal to a broader audience of retail buyers because the likes of Facebook and LinkedIn are well known.

"We anticipate digital media to be the first and most active in the marketplace," says Johnny Williams, head of technology equity-capital markets at Bank of America Merrill Lynch, who is based in Palo Alto, Calif. "Additionally, we expect an even spattering among communications equipment, clean technology and software, and a somewhat lesser degree of activity in the semiconductor and services companies."

Fewer Seeders Around, But Hedgies Love Them

Startup hedge funds want to avoid the time and costs associated with hiring marketing professionals and that's where seeders come in

By Ken Tarbous
November 20, 2009

Hedge funds are not back to where they were before Lehman Brothers' bankruptcy, but some investors have returned and former Wall Streeters who think they have interesting investment ideas still want to hang out their own shingles.

To do so, these upstart funds are increasingly ready to give up a percentage of equity to specialty firms known as seeders that provide services such as marketing and distribution.

The capital available from seeders is a fraction of what it was just a few years ago and the number of specialty firms willing to back startups is off substantially, according to industry reports. But any help from these seeders remains welcome for hedge fund managers like Tom Grossman, who worked at Goldman Sachs in the early 1990s on the firm's international sales and trading desk.

"Accepting the seed capital was a good idea," says Grossman, principal of Union Avenue Advisors LLP, which opened its doors last year. "It was easier and faster to get to market."

Grossman partnered with New York-based SkyBridge Capital to forgo the costs of building a marketing infrastructure — which his seeders already had — and take advantage of additional existing due-diligence and risk-management teams made necessary by increased investor scrutiny.

"Post-financial crisis, the landscape has changed drastically in [that] the amount of infrastructure and investment [needed] to build a fund is way up," Grossman said. "Before they're going to attach their name to a hedge fund, they're going to do an incredible amount of due diligence."

He views the arrangement as a "true seeding relationship" that strengthens the marketability of his fund. "It's a great comfort to have mature investment professionals who are true partners of the business and not just investors," he said "The seeding role helps [and] adds a layer of comfort for investors."

Prior to starting up Union Avenue, Grossmann started the SAC International Equities fund and his own APC Fund at Aeneas Capital Management.

Scott Prince, managing partner at SkyBridge Capital, believes that today's challenging fundraising environment is a contrast to the 2003 to 2007 period, when raising capital was a seemingly effortless task. SkyBridge owns a piece of the revenue for each investment it makes, and though it has seen an increased demand for capital from emerging managers over the past year, seed capital for hedge funds has become a scarcer resource.

According to New York-based Acceleration Capital Group, a division of Arcadia Securities, the amount of aggregated hedge-fund seed capital available for investment in third and fourth quarters of 2009 dropped to $1.31 billion from $2.35 billion in the first half of 2009. That's a big drop from $7.51 billion available in the latter half of 2008.

Acceleration Capital tracks a pool of 100 hedge fund seeders globally for its Seeder Demand Research. It found that 19 have left the business, while 35 are not currently backing startups. Meanwhile, 14 firms are actively seeding hedge funds while 27 are opportunistically seeding. Five new seeders have come into the market.

For the past 18 months the number of new hedge funds coming to market was down significantly from where it had been three to four years ago, says Anita Nemes, global head of capital introductions at Bank of America Merrill Lynch. Since July, though, the space has been more active as large seeders are returning to make deals putting seed capital with emerging hedge funds. Along with the increase in activity, she estimated that the median deal size has grown from $25 million three years ago to $75 million this year.

With a dearth of capital in the marketplace, seeders are taking advantage of a vast talent pool of emerging managers across the globe. With all the choices, though, they are more selective about where and with whom they invest, doing more due diligence and looking at managers' pedigrees, market participants say.

"It depends on who you are and if you are established and are very strong, that can definitely attract capital, and if you don't have a strong track record, it is more difficult to attract capital," says Michael Gray, head of fund formation and investment management practice at Chicago law firm Neal Gerber Eisenberg LLP. Gray has served as counsel for hedge fund managers and investors.

In addition to being more selective about where and with whom to put their money to work, investors also are exercising their new-found ability to demand better terms from emerging hedge fund managers. But there's no plain-vanilla form of a seed deal, and the terms are specific to each situation.

"Obviously, right now the supply-demand imbalance means seeders have a big advantage negotiating deals," Nemes says. "The majority of seed deals have been negotiated via revenue sharing agreements, however, due to increasing supply and lack of demand from traditional day one investors, active seeding firms have been able to negotiate more favorable terms throughout 2009."

Evolving deal structures such as changes to lock-up periods — some of which have shrunk to as little as two years — seed amount, length of capital commitment, the percentage of management or participation fees seeders get, for example, depend on how strong the proposition is and track record of the managers, Nemes says.

When it comes to deal terms, SkyBridge's Prince — who said even the big established hedge fund managers are having difficulty finding new capital — has seen deal-making dynamics change.

"There has been a new level of scrutiny by investors of hedge fund managers," said Prince, a former partner at Eton Park Capital Management and co-head of equities trading and co-head of global equity derivatives at Goldman Sachs until 2004. "There has been a shift of power between investors and hedge fund managers."

Bond Buyer Gives Nod to Dulles Project

Investment Dealers' Digest
December 4, 2009

Annual awards salute novel deals in the world of municipal finance

By Ken Tarbous

This week some 200 muni finance specialists came together to honor the best and brightest in The Bond Buyer's 8th annual "Deal of the Year" awards at the New York Academy of Sciences in Lower Manhattan.

The winner of the top award was a transaction that will help finance the extension of rail service to Washington, D.C.'s Dulles International Airport from the nation's capital. Talk among attendees focused on the positive role the municipal finance market plays in creating and maintaining the nation's public institutions, especially striking in a year when most every level of government in the U.S. has been broadly criticized for its spending and budget deficits.

"Public finance is essential to America. It supports schools, builds infrastructure, and helps develop communities," Robert Tucker, a managing director in fixed-income investor relations at bond insurer Assured Guaranty, told IDD.

The Bond Buyer's Deal of the Year went to the Metropolitan Washington Airports Authority's $963.29 million Dulles Toll Road project.

The MWAA has a concession to run the Dulles Toll Road and the project uses the revenue to fund the first phase of a 23-mile extension of the Dulles Corridor Metrorail to parts of Virginia and to connect the airport to downtown D.C. as well as other capital improvements. "We were an airport operating a toll road to build rail," said Andrew Rountree, deputy CFO of the authority. "Oddly enough, we waited 47 years for the worst economic downturn to make this dream happen."

Dulles airport was dedicated by President John F. Kennedy back in 1962.

The MWAA deal involved a unique mix of capital improvement bonds, capital appreciation bonds, and Build America Bonds in capturing the revenues of an existing toll road to finance a transit project.

More than 60 transactions, ranging in size from a few million dollars to hundreds of millions, priced between Oct. 1, 2008, and Sept. 30, 2009, were nominated for the 2009 awards.

The federal government was presented with an award for market-changing innovations, including Build America Bonds (BABs) and Qualified School Construction Bonds (QSCBs), created under the American Recovery and Reinvestment Act.

Among the finalists was the District of Columbia, which saw a turnaround since the 1990s when it was saddled with a junk rating and operated under the supervision of a federal financial control board. The district's $801 million deal was backed by income tax revenue and garnered double-A and triple-A ratings.

"Ten years ago the district was a joke on Wall Street. I don't think we would have made it to this event, even as doorkeeper," said Natwar Gandhi, D.C.'s CFO.

Recognizing the people in the public and private sectors who contribute to the greater good is important, attendees said.

"It's a great opportunity, in a difficult economic environment, to celebrate the efforts of the professionals whose hard work benefits the municipalities and serves the investors' needs," said David Safer, vice president at BNY Mellon, who worked as bond trustee on several of the deals recognized by The Bond Buyer.

The awards program raised $5,000 for Smile Train, a charity providing cleft lip and cleft palate surgery to children in need around the world, and it marks the beginning of the season for deal awards. After all, The Bond Buyer's sister publication IDD has its own deal of the year awards and the submissions deadline is Dec. 18.

Deal of the Year finalists were selected from The Bond Buyer's designated U.S. regions in large and small issuer categories determined by most recent fiscal year gross revenue of the issuer or the entity financed. Issuers in the small deal category include those with annual revenue of $70 million or less, or beneficiaries with those revenue levels in conduit deals. Large deals were those above $70 million.